Legal Battle Starts on ATM Surcharges.

How can a city like Santa Monica tell an institution the size of Bank of America Corp. what it can and cannot charge people who use its automated teller machines?

Bank of America and Wells Fargo Bank say it can't, and are going to court to prove it. Consumer advocates say it can. And the legal profession is divided.

The debate is over the typical surcharge of $1.50 that banks charge customers using a "foreign" ATM -- in addition to the $2 the home bank takes from its customers for using another bank's machine. About 50 cents of the latter fee then goes back to the foreign bank. The cities of Santa Monica and San Francisco recently banned the surcharges, which prompted the two banks to restrict the use of their ATMs in Santa Monica to their own customers.

Both laws are being contested in court by the California Bankers Association, which maintains that only the federal government can regulate federal chartered financial institutions such as BofA and Wells.

"National banks can't operate when they're subject to the vagaries of local ordinances," said association spokesman John Stafford. "We are very confident of our legal footing in this area."

Not surprisingly, the Santa Monica and San Francisco city attorney's offices disagree, citing the 1978 Electronic Funds Transfer Act enacted by Congress, which declined to restrict state regulation of ATMs.

"The federal government set the skeleton of the law," said Santa Monica Deputy City Attorney Adam Radinsky. "They wanted cities and states to put meat on it, to protect consumers."

But the question of whether ATM fees really fall under the banner of consumer protection is debatable.

Consumer advocates charge that the consolidation in the banking industry means only a few banks own the majority of ATMs -- making it harder for people who aren't customers of those banks to use ATMs.

In fact, Wells Fargo and Bank of America control about three-fourths of the ATMs in California. Consumer groups maintain that the two giants siphon accounts away from community bank customers who can't always get to their own bank and get fed up with paying the charges.

But high bank fees, while perhaps enraging to the consumer, are not the same as unsafe automobiles or toys that may be harmful to children.

"What do we mean by consumer protection?" said Stephen Bainbridge, a professor of law at UCLA who specializes in financial issues. "Is it anything that affects consumers, or is it limited to disclosure, like whether your car is a lemon?"

The other, more problematic legal issue for the cities is their contention that because Congress hasn't done anything about ATM regulation, Santa Monica and other cities have the power to do so.

"It is true that the feds haven't decided to limit ATM fees, but that doesn't free cities to do so," Bainbridge said. "The Electronic Funds Transfers Act deferred to states, but it is not clear to me that it extends down to the municipal level."

As a result, the courts may take a dim view of having cities regulate banking activities. Among other things, the practice would likely lead to confusion among customers who won't know which areas have ATM fees and which don't.

If L.A. joins Santa Monica in banning the fees, "what about Beverly Hills?" asked Bainbridge. "What about Culver City? What about the unincorporated areas? That's troubling. It's balkanization."

ATM-fee foes like Santa Monica City Councilman Michael Feinstein acknowledge that some confusion may result when cities enact their own regulations. But he maintains that the favorable public response to the actions of Santa Monica and San Francisco could cause a national groundswell that results in federal action against the fees.

"I expect what we'll see here is, it will become state and national legislation," he said.

Industry officials are hoping that other cities will wait until the court battle, which begins Nov. 15, plays itself out. The CBA has filed for a preliminary injunction in federal court in San Francisco to prevent both the Santa Monica and San Francisco ordinances from being enacted.

Meanwhile, the L.A. City Council is having the City Attorney's Office look into the viability of banning surcharges, and Councilman Alex Padilla thinks waiting for the courts serves little purpose.

"If our city attorney believes it is viable, we'll take a look at it," he said. "I wouldn't want to wait because as consumers, we need relief from ATM fees."

Besides, as Bainbridge points out, this is the kind of litigation that is likely to last for a long time, because it involves questions about the rights of localities and states versus the federal government, as well as consumer protection issues.

"This whole issue is going to be a full employment act for banking lawyers," he said. "I happen to think the cities and states are wrong, but it passes the straight-face test. They won't get laughed out of court."